Global Economics

Will Russian Woes Spread to Central Asia?

November 19, 2008

Ordinary Russians are feeling the sting of a slowing economy, and republics such as Uzbekistan, Kyrgyzstan, and Tajikistan may be next

A glance through some newspaper headlines of a century or so back can be a useful antidote to feelings of incipient financial panic in the east. "Threatened Financial Crisis. A Crash of the Most Serious Nature Feared in Russia," The New York Times screamed in 1876, while early in the next century a Prof. Friedmann of Kieff announced that a crash in Russia "is now practically inevitable."

During this latest slump, headline writers have seemed almost obsessed with the economic slowdown's effects of the lifestyles of Russia's rich and famous. Take your pick: Russia's rich are "Hammered by Global Crisis," or they're "Still Splashing Out Despite Financial Crisis." Both, probably, but the real story is elsewhere. Already jobs are being shed in the real economy. The worst effects may soon be felt, though, not by ordinary Russians but by Central Asians, with the potential to inject more gloom and, maybe, instability into the restive cities of the Ferghana Valley.

We can hope that the Russian government, armed with an enormous stabilization fund from oil and gas sales, may be able to stave off the worst of the crisis. The signs are, though, that Russia is in for some serious belt-tightening. Layoffs or salary cuts are reportedly spreading throughout the Russian economy, from banking and financial houses to construction.

Weakness in the construction industry, especially, will spread and magnify in the Central Asian republics because they are so closely entwined with the Russian economy yet mostly lack the cash to cushion the blows to economies already weakened through poor infrastructure, corruption and inequitable distribution of resources.

Russia's economic presence in all five former Soviet "Stans" runs deep, built up by a complex net of formal and informal connections. Russian, and earlier Soviet, investments have been vital to the region's petroleum and commodities sectors, and in channeling glacier-fed waters to hydroelectric plants and cotton fields. Flowing the other way, a million, perhaps two million, Central Asians work on building sites and run market stalls in Russia, remitting several billion dollars home every year.

At the center of this ebb and flow sits Kazakhstan, the region's healthiest economy and itself a magnet for perhaps several hundred thousand Kyrgyz, Tajik, and Uzbek workers.

In Russia and Kazakhstan, the construction industry is one of the biggest employers of cheap, hard-working migrants. And, as always, in hard times construction is one of the first industries to slow down. As an upcoming TOL article will report, confidence in Kazakh banks' ability to collect on outstanding loans began to falter last year, and the construction industry has been among those hit hardest by the resulting credit crunch. The government is now about to pump $15 billion from its "oil fund" to help banks stay afloat. Whether that will trickle down to builders any time soon remains to be seen.

In Russia, acknowledging the shakiness of the construction, as well as banking and retail sectors, First Deputy Prime Minister Igor Shuvalov said two weeks ago that the government would act as a buyer of last resort for nervous builders, spending up to 100 billion rubles ($3.7 billion) to purchase unfinished apartment buildings. The aim is to create "government demand" to support property prices in case private demand dwindles, he said.

Economic forecasts are notoriously chancy, but it seems likely that many construction workers from Central Asia now in Russia and Kazakhstan will soon be jobless, or working shorter hours, and some will be thinking of going home. But for many who hail from depressed rural areas, that is hardly an option. In parts of Kyrgyzstan and Tajikistan, villages have been virtually emptied of able-bodied adults because the local agricultural-based economies are not robust enough to provide a living wage. Inevitably, many returnees will end up in the cities of the Ferghana Valley, places like Osh, in southern Kyrgyzstan, where hundreds of children live and work in the streets. Places where the lights flicker erratically, where there are worries of food shortages after last year's harsh winter and poor harvest. Places like Andijan.

If it did not seem so far-fetched and so oblivious of the ethnic profiling that colors their immigration policies, we might argue that Russia and the EU should consider easing restrictions on short-term labor migrants from Central Asian. But even if that were to happen, for the coming winter there seems little that the rich world can do beyond sending food aid to lift the spirits of Central Asia's poor.

The picture is not uniformly gloomy. Earlier this month Tajikistan's president announced that thanks to a new hydropower generator, electricity will flow to many Tajik homes for an additional three to four hours daily, and large towns will not face brownouts this winter. That at least is some solace for construction workers wondering when and where they'll next have a job.